Employers Reconsider Retiree Medical Strategies

Employers weigh group plans vs. subsidized coverage through the individual market

By Stephen Miller, CEBS Oct 2, 2012

Six in 10 U.S. employers that provide retiree health care coverage are considering alternative strategies for delivering this benefit in light of market changes under the Patient Protection and Affordable Care Act (PPACA), according to a 2012 survey by HR consultancy Aon Hewitt.

Of those employers planning changes to their coverage, 63 percent are implementing or considering subsidized coverage through the individual market.

Health Care Reform's Impact

Among other changes, the PPACA closes the Medicare Part D drug coverage "donut hole." Revisions also are made to how the federal government pays private Medicare Advantage plans to provide basic Medicare benefits. The PPACA reduces federal payments to Medicare Advantage plans over time, bringing them closer to the average costs of care under the fee-for-service Medicare program.

“Changes to the Medicare Part D and Medicare Advantage programs, along with the choice, competition and generally favorable rating rules, have made the individual market very cost-effective compared to a group insurance program,” said John Grosso, health care actuary and leader of the Aon Hewitt retiree health care practice, in a media statement. “We expect that there will be a similar opportunity for pre-Medicare retirees beginning in 2014,” when new state-sponsored health care exchanges are scheduled to begin operating.

In addition to an individual market strategy, employers are currently pursuing two other general retiree health care strategies, described below, in response to provisions under the PPACA.

Medicare Part D Strategies

The Centers for Medicare and Medicaid Services’ 2005 regulations for implementing Medicare Part D prescription drug coverage gave employers four options:

  1. Offer prescription drug coverage that’s actuarially equivalent to the standard coverage under Part D and receive the federal Retiree Drug Subsidy (RDS) for each eligible retiree not enrolled in Part D.
  2. Become a prescription drug plan and self-insure.
  3. Contract with a prescription drug plan and fully insure.
  4. Offer prescription drug coverage that supplements or wraps around Part D.

As of 2013, employers that receive the federal RDS for providing retiree prescription drug coverage will no longer be able to take a deduction related to the subsidy.Prompted by the elimination of the tax-favored status of the RDS, a majority of employers (61 percent) expect to change their Medicare Part D or broader strategy for Medicare-eligible retirees. Of those plan sponsors, 17 percent made changes in 2011 or 2012, another 11 percent will make changes for 2013 and nearly three-quarters (72 percent) are exploring what actions to take and when.

Of employers who have decided to make changes to their retiree drug program, 62 percent are moving forward with providing a group-based Medicare Part D prescription drug plan, while 32 percent will leverage the individual Medicare-eligible health insurance market in some manner.

Excise Tax Mitigation Strategies

To mitigate the cost of the "Cadillac" excise tax on high-cost health plans scheduled to take effect in 2018, 29 percent of retiree health plan sponsors anticipate changing plan features, such as deductibles, co-payments and co-insurance. Twenty-two percent would favor sourcing coverage through the state exchanges, and 18 percent favor changing retiree premium cost-sharing in some manner.

While most employers anticipate needing to manage excise tax exposure over time, 69 percent do not anticipate announcing or implementing actions in the near-term.

Workers Aging Into Retiree Health Changes

A growing number of workers are realizing they will not get retiree health care from their employer after they stop working, according to a new report by the not-for-profit Employee Benefit Research Institute (EBRI).

The report, “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997‒2010,” was published in the October EBRI Issue Brief.

While earlier research found little impact from reductions in coverage on current retirees, EBRI found that initial changes employers made to retiree health benefits affected future retirees as opposed to then-current retirees. Over time, more and more retirees have “aged into” those program changes, resulting in the greater impact found in more recent studies.

Paul Fronstin, head of health benefits research at EBRI and co-author of the report, noted that for many years, despite the downward trend in retiree health coverage, many workers still thought they would receive the benefit.

“The data show that workers are still more likely to expect retiree health benefits than retirees are actually likely to have those benefits, but the expectations gap is closing,” Fronstin said. “By 2010, 32 percent of workers expected retiree health benefits, while only 25 percent of early retirees and 16 percent of Medicare-eligible retirees had them.”

Benefits Reduced

While many employers no longer offer retiree health benefits, most that have continued to do so have made changes in the benefit package they offer: raising premiums that retirees are required to pay, tightening eligibility, limiting or reducing benefits, or some combination of these, EBRI found.

Increasing retiree contributions tops the list of likely future changes among employers that still offer the benefit: 43 percent of employers say they are very likely to increase the retirees’ portion of premiums next year, and another 35 percent are somewhat likely to do so.

Private Exchanges Offer Savings, Options

An Aon Hewitt survey of 550 companies covering almost 4 million retirees showed more than 60 percent of employers were reassessing their long-term retiree health strategy in response to rising health care costs and mandated changes from the PPACA. Approximately 20 percent of employers offered guided access to the individual Medicare retiree plan market through an individual health exchange and another two-thirds were considering this strategy for the future. According to Aon Hewitt, employers can potentially reduce their gross retiree medical spend by 20 to 50 percent per year by transitioning retirees to this type of model.

“The economics of providing traditional employer-sponsored retiree health coverage are changing, and employers are seeking the most cost-effective and tax-efficient delivery models,” said John Grosso, a senior vice president in Aon Hewitt’s health and benefits practice. “Retiree exchanges provide access to these individual market efficiencies, along with a wider choice of health plans than exists in the traditional employer-provided retiree health plan. Very often, retirees can purchase individual Medicare Advantage, Medigap or Medicare Part D plans at lower rates than the employer can offer for comparable coverage due to the federal subsidies, Medicare Part D program enhancements and market-based competition found in the individual market.”

In addition to having access to a wider range of options, Aon Hewitt estimates that retirees can save an average of $1,000 each year when purchasing their health benefits through an individual retiree exchange.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related External Article:

Employers Offer Aid to Retirees After Cutting Health Insurance, Washington Post, October 2012

Related SHRM Articles:

Health Insurance Exchanges and Early Retiree Health Coverage, SHRM Online Benefits, August 2012

Post-Reform, Retiree Medical Benefits Are Under Review, SHRM Online Benefits, April 2012

Build a Bridge to Health Exchanges for Early Retirees, SHRM Online Benefits, February 2011

Health Savings Accounts Can Build Retirement Wealth, SHRM Online Benefits, October 2010

It's Complicated: Coordinating Medicare, Employer Health Plans, SHRM Online Benefits, April 2011

Quick Links:

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SHRM Online Health Care Reform Resource Page

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